(Article from Insurance Law Alert, October 2025)
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Holding
A policyholder’s failure to report a tax audit in a renewal application was material, warranting rescission of the policy. Call One Inc. v. Berkley Ins. Co., 2025 U.S. Dist. LEXIS 193697 (N.D. Ill. Sept. 30, 2025).
Background
Call One, a telecommunications business, provided tax exemptions to certain governmental and non-profit entity customers. In 2010, a Call One employee was informed by a potential customer that such exemptions were improper. The employee followed up with the Illinois Department of Revenue and learned that the exemptions were in fact improper. He relayed this information to his supervisor and other employees but nonetheless continued to advertise the exemptions to customers based on the belief that management wanted him to do so.
Unbeknownst to Berkley, in 2016, the City of Chicago initiated an audit of Call One’s financial records. In connection with the audit, Call One signed a “Consent to Waive Statute of Limitations” form in 2016, 2017 and 2018, at the request of the City.
In a separate development in 2017, Call One’s Chief Financial Officer learned that the company had failed to remit taxes in other states. She informed fellow executive members about this failure and the potential ramifications. To resolve this issue, Call One retained two tax advisory firms which began conducting work in February 2018.
In June 2018, Call One filled out a renewal application for its professional liability policy, which was first issued by Berkley in 2011. The application included the following question: “Within the last 12 months, has there been any change in the status of any claims, loss or circumstances reported in any application previously submitted to the Insurer?” Call One had answered “No” in previous years but left the response field blank in 2018.
In 2019, Call One sought defense costs from Berkley for a qui tam action filed against it, as well as indemnity for a subsequent settlement in that suit. The parties disagreed whether Berkley paid all costs of defense, but agreed that Berkley did not indemnify Call One for the settlement. Call One sued Berkley, alleging breach of contract and bad faith. Berkley asserted a counterclaim, seeking rescission of the policy. The parties cross-moved for summary judgment and the court ruled in Berkley’s favor.
Decision
As a preliminary matter, the court rejected Call One’s assertion that Berkley waived its rescission claim by failing to raise it when it filed a motion to dismiss based on policy terms rather than rescission. The court explained that since Call One’s complaint did not contain facts relevant to rescission, Berkley’s motion to dismiss “cannot be reasonably understood as a clear, unequivocal, and decisive waiver of its rescission counterclaim.” The court also held that the four-year gap between the renewal application and the counterclaim did not establish waiver because Berkley did not know about Call One’s liabilities at the time of renewal and when it discovered them, filed a counterclaim without undue delay.
The court further held that Berkley established grounds for rescission. First, the court concluded that Call One’s failure to report the City of Chicago audit was a misrepresentation, stating: “when Call One signed a waiver related to the audit but did not provide relevant details on the 2018 Application Renewal, it failed to disclose a Claim or a circumstance that might reasonably result in a Claim.” In so ruling, the court rejected Call One’s contention that because it never admitted wrongdoing in connection with the audit, there was no material omission, explaining that the audit itself was predicated on the allegation that Call One underpaid taxes.
Having found that Call One made a misrepresentation in the renewal application, the court turned to the issue of materiality. The court noted that the testimony of an underwriter indicating that he relied on the application to provide renewal terms, standing alone, is insufficient to establish materiality. The court explained that underwriter testimony has been deemed sufficient if it directly addresses whether the application would have been rejected or whether a higher premium would have been charged had the information been provided, but that statements of general reliance fall short of satisfying the materiality requirement.
However, the court deemed the misrepresentation material as a matter of law under Illinois’ “objective test,” stating: “If a reasonably careful and intelligent person learned that, in 2018, Call One was embroiled in an ongoing audit concerning an alleged failure to remit four types of taxes, that person would, ‘at the very least, reconsider [Call One’s] premiums.’” Additionally, the court noted that the subsequent settlement between Call One and the City of Chicago further supports materiality since it increased Call One’s exposure and thus Berkley’s risk.
Comments
Although the rescission ruling was dispositive of the suit and eliminated Berkley’s coverage obligations, the court went on to address Call One’s breach of contract and bad faith claims “for the sake of completeness.” The court reached the following conclusions: the qui tam action against Call One was a “Claim” under the policy; Call One’s liability for failure to remit taxes was not uninsurable as a matter of public policy; the professional services exclusion did not bar coverage; the known loss doctrine was inapplicable; and that even if Berkley had not been entitled to rescission, it did not act “vexatiously and unreasonably” in denying coverage for the purposes of establishing bad faith.